The new American dream: Leasing your house

In Southern California, detached, single-family rentals increased 29 percent over the last decade — vs. a 13 percent increase in apartment units, according to the most recent U.S. Census data.

Making sense of the story:

• The tally jumped to 736,400 rental houses in 2016, equal to one out of every four houses in the region. The increase matches trends elsewhere.

• California had a 27 percent gain to 1.8 million rental houses in the most recent decade. Across the nation, detached, single-family rentals jumped 30 percent to 12.5 million in 2016.

• Renters are moving into houses for space, for schools or for privacy, a recent survey by U.C.
Berkeley’s Terner Center for Housing Innovation found. Landlords, on the other hand, range
from small investors to gigantic hedge funds but also include retirees hanging onto their old
houses because they’re in high demand.

• The change could be contributing to a nationwide shortage of homes for sale. It also has
numerous implications for family wealth and for policymakers, since there now are 7 million
more renters in American than a decade ago, and nearly 414,000 more in Southern California.

• The Terner Center study found that while 80 percent of single-family tenants want to buy a home in the next five years, more than 90 percent have financial obstacles to buying.

• Nearly 27 percent of single-family renters who had been homeowners had lost a home to foreclosure. Other factors include student and consumer debt, difficulties in qualifying for a mortgage, or not being able to save for a down payment.

As with all investments real estate investment has it own risks and the decision to invest should be carefully considered.

As a landlord there are certain costs that you will need to cover, potential vacancy problems that may strain your ability to pay your mortgages, and liability issues. It is important that you speak with an expert before putting yourself in a situation where you can potential over-extend yourself.

With that in mind, I have included some of the basic property types and benefits associated with real estate investment.

Single-family residence. First time real estate investors are usually advised to buy a single family detached home and rent it out as it’s market value appreciates. The reason for the popularity is that they are relatively easy. They are easy to buy, easy to finance, and they hold appeal to buyers and renters. Also, if you find that the real estate investment game was not the right choice for you they are relatively easy to turn over. Mortgage brokers know this-so these properties are also usually easier to finance and refinance.

Vacation property and second homes. Investment options in this category are myriad, from outright purchase to fractional-interest contracts and timeshares. Even if the property isn’t income producing, it can appreciate into a worthy investment, and mortgage interest is fully deductible. If you do rent the property when it’s not in use, realized income and tax obligations depend on what percentage of the year it’s kept for “personal use”-a tightly defined term you should discuss with a real estate attorney.

Apartment properties. Apartment properties require a long-term commitment, as well as a substantial investment of borrowed and equity capital, but due to the availability of professional managers they often don’t demand a lot of personal time. If you are the do-it yourself type then you might find yourself spending your weekends painting, advertising vacancies, and repairing faucets – though the higher return might be worth it for you. They can have mortgage loans of up to 100% of value, while other investment types may require all cash. Loans can be amortized or paid with the income generated by rents.

Condominiums. Condominium investments provide a bit of extra risk. Their market value appreciates more slowly than for detached single-family residences, and rental rates usually aren’t high enough to cover mortgage, property tax, and maintenance fees.

Vacant land. Vacant land is probably the least liquid and therefore usually the weakest choice for a profitable shorter-term investment. While undeveloped land is easy to maintain, it nearly always takes longer to appreciate and longer to sell.

Commercial property. To reduce personal liability and offset the greater expense of these properties, some investors form or join a limited liability company. Because of the extremely high risks involved with this type of agreement, consulting a real estate attorney is essential before taking this step. You probably shouldn’t consider this arrangement if you aren’t personally familiar with the other partners and their business expertise.

Homebuyers getting more anxious about affordability

Source: Investors Business Daily

Homebuyers in the U.S. are growing more anxious about their ability to afford a dwelling of their own, and that’s especially true of millennials, says a new survey from Redfin. Another concern they have is high rent, with nearly half of first-time homebuyers surveyed saying that it pushed them into the housing market. And while low inventory was blamed as a major factor in July’s drop in sales of existing homes, that was third on the list of homebuyers’ worries, after affordability and competition from other shoppers.

Making sense of the story

In previous surveys, the second- and third-most cited concerns made up a far higher percentage of total responses. Last year it was 31.4 percent, while in May it was 33.5 percent. In other words, affordability is gaining prominence as the number one concern among buyers.

Among the 1,887 homebuyers participating in the Redfin survey, those who said affordability
was their biggest concern grew to 28.1 percent this summer, compared to 26.6 percent a year ago. Anxiety about competition in the market again got the next-biggest share of responses, but it was cited by only 13 percent this year, compared to 17 percent in 2015.

Worry about lack of inventory again was third, but fell 2 percentage points — from 14.4 percent
of responses to 12.4 percent. The only other response reaching double digits was the share of
homebuyers who had “no concerns,” which increased slightly to 10.4 percent from 9.5 percent.

Among millennial homebuyers, nearly a third said affordability was their top concern. About half that number (16 percent) expressed worry about competition from other buyers, while about 1 in 8 (12 percent) were most troubled about the available housing inventory. And slightly more than 1 in 10 said they were the most uneasy about coming up with a down payment.

While statistics on the gap in affordable housing clearly indicate the magnitude of the problem, they mask the extent of the difficulties that certain low-wage workers often face in obtaining a unit they can afford, particularly in major metro areas.

Making sense of the story

Data from the Bureau of Labor Statistics indicate that in many markets, most full-time cashiers, retail and sales persons, and food preparation workers would have been unable to afford even a modest one-bedroom apartment.

The fair market rent of a two-bedroom apartment was even further out of reach for these workers: as high as $2,062 in San Francisco and over $1,400 Washington, DC, Boston, New York, and Los Angeles.

Other occupations where median annual wages were inadequate for households to afford a
modest one-bedroom apartment include—but are not limited to—EMTs and paramedics,
childcare workers, security guards, and several types of healthcare support occupations.

All of these jobs are vital to local economies, and support a variety of businesses and services required for healthy, growing communities.

Wage stagnation among low-income households is certainly part of the problem. Between 2001 and 2014, the median real household income for renters in the bottom quintile fell 9.9 percent, while income for households in the top quintile was up 3.1 percent.

To make ends meet, many low-wage households must reduce expenditures on food and
healthcare, move to areas which are less accessible and require longer commute times, or double up with family or roommates.

Nearly a third of the nation’s 7 million renters earning less than $35,000 in 2014 had minors
living at home, and fully half of these families reported being severely cost-burdened in the same year—paying more than half of their incomes for housing.

“New apartments hitting the rental market in 2016 are 8% smaller than they were 10 years ago, according to a recent report from online rental marketplace RentCafe.

“Meanwhile, rents for all apartments on the market have risen 7% in the last five years.

“This year, the average square footage of all new apartments, including studios, one-bedroom and two-bedroom apartments, was 934 square feet. Just a decade ago, the new units coming online offered an average of 1,015 square feet.

“The national average for rent this year is $1,296 compared to $977 in 2011…”

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About John A Silva

As your local real estate adviser in the area of San Diego County with over 27 years of experience, my goal is to provide you with relevant local housing market information, tips, and advice.

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